Planning for Liability: An Ounce of Prevention to Avoid Paying For a Pound of Cure

PLANNING FOR LIABILITY TO AVOID LIABILITY: An Ounce of Prevention to Avoid Paying For a Pound of Cure Duncan G. Byers, Esq. Pender & Coward, PC Virginia Beach, Virginia

I. Background • Overview • Planning intellectual property protection at an early stage is important for several reasons • Tracking • Identification of IP • Shielding from liability • Planning strategies for complying with legal requirements • Determine if the IP research/development is allowed under applicable law (SEE APPENDIX I – research exceptions)* • Business planning • Significantly reduces costs for prosecution and litigation (both plaintiff and defense)

Cost Exposures • IP theft by departing employees • Loss of opportunities to identify and file for protection for IP • Loss of opportunities to research prior art, allowing avoidance of infringement liability • Wasted resources • Rethinking business method patents in light of the Alice Corp. v. CLS Bank, 134 S. Ct. 2347 (2014) decision and its progeny • Alternative protection strategies should be considered to avoid the high cost of prosecuting business method patents except as necessary for deterrence and other planning strategies* • Reviewing prior art to avoid duplication of effort and to design around existing technology • Liability and Litigation

Specific Cost Exposures: Liability and Litigation • US Patent Litigation is on the rise: although down 2% from 2015, there were 5,600 new patent cases filed in 2016 – almost double the number of patent cases filed in 2010.* • The majority of cases – 75% - in the past five years have been decided by jury trial instead of by bench trial • Litigation costs have been steadily increasing • The cost with < $1Million at risk - $400,000 through the end of discovery; $600,000.00 through trial** • The cost with $1-$10 Million at risk - $950,000 through the end of discovery; $2 Million through trial • The cost with $10-$25Million at risk - $1.9 Million through the end of discovery; $3.1 Million through trial • The cost with >$25Million at risk - $3 Million through the end of discovery; $5 Million through trial • The cost of mediation however: $100,000 - $300,000 • Non-practicing entity success rates are as high as 48% in the Eastern District of Texas but only 17% in the Eastern District of Virginia • Proceedings at the US Patent and Trademark Office are also increasing, addition to wait times, exposure, and cost * 2016 Patent Litigation Study, Price Waterhouse Cooper. www.pwc.com/us/forensics. ** AIPLA Report of the Economic Survey 2015

Why do we care about all this? • Damage awards • Nonpracticing Entities awards • Specific jurisdications • Top five (5) U.S. favorable districts for patent holders are: Virginia Eastern District, Texas Eastern District, Delaware, Wisconsin Western District, and Florida Middle District • Since 2000, most cases have been decided by juries • The time-to-trial in these five jurisdictions is: VAED (“Rocket Docket”) – 12 months; WDWis – 13 months; MDFla – 22 months; DDe – 24 months; EDTX – 27 months*

Why do we care about all this? • Median damages awards*: • Virginia Eastern Dist. - $32,651,682 • Texas Eastern Dist. - $ 9,402,274 • Delaware - $17,000,000 • Wisconsin Western Dist. - $ 7,997,380 • Florida Middle Dist. - $ 226,503 • Source: 2016 Patent Litigation Study, Price Waterhouse Cooper LLC. www.pwc.com/us/forensics

II. THE COST OF PROTECTION • Legal fees can be the largest up front expense • Research and opinions of counsel • Preparation and prosecution of applications • Creation and implement IP protection plans, including appropriate documentation • Coordination and review of IP protection plans • Additional information research • Consult early and often • But are cheap compared to the cost of not planning from the outset

AVERAGE COSTS • Research and opinions (per patent) • Novelty search, analysis and opinion: $ 3,278* • Validity/Invalidity only opinion: $13,015 • Infringement/Non-Infringement only opinion: $11,323 • Combination Validity and Infringement $18,987 • Preparing and filing applications • provisional $ 4,938 • minimal complexity non-provisional $ 7,622 • relatively complex biotech/chemical $11,944 • relatively complex electrical/computer $11,810 • relatively complex mechanical $10,657 • Prosecution of applications • Amendment/argument $ 2,479 - $10,250 * AIPLA Report of the Economic Survey 2015

AVERAGE COSTS (2) • Patent Office proceedings • Appeal to Board without oral argument $ 4,968 - $14,400 • Appeal to Board with oral argument $10,407 - $32,500 • Appeals to the Federal Circuit from the USPTO • Carefully consider • Federal Circuit success rates • Appeals are costly

III. REDUCING COSTS • Cost certainty / alternative billing structures • Hourly versus fixed fee: patent protection • Only an average of 26-37% of patent applications are prepared and filed utilizing a fixed fee • At Pender & Coward, patent applications are prepared and filed almost exclusively using a fixed fee* • Use alternative billing for patent prosecution and litigation

REDUCING COSTS (2) • Patent prosecution • Flat/fixed fee rates • Readily-available data as benchmarks • Prosecution and appeals • Prior art searches/clearances/opinions • Patent preparation and filing • Responding to office actions • Preparing and filing appeals • Particular events in appeals/reexaminations/etc.

REDUCING COSTS (3) • Litigation • Preparation: $100,000 of protection is worth millions in cure vs. • Preparation includes identifying and preserving information early • Alternative fee structures • Go on the offensive

REDUCING COSTS (4):Advice of Counsel • Advice of Counsel is a defense against claims of willful infringement. • Failure to obtain the advice of counsel, or the failure to present evidence of such advice to a court or jury may not be used to prove that the accused infringer willfully infringed. 35 U.S.C. § 298.

Advice of Counsel (cont.) • However – the cost of obtaining a Freedom-to-Operate or other opinion of counsel (non-infringement, etc.) is far cheaper than facing an infringement suit without having obtained an opinion first

IV. PLANNINGStarting Early • Develop a plan for the tracking of IP creation and review of IP development • The plan should include reviews by both management and counsel • The plan should track not just development but responsible parties and particular input

PLANNING (2)Specific Planning: Overview • Will be task specific • Will vary from technology to technology • Will vary from company to company, • Do a cost-benefit analysis

Specific Planning:Scope • Define the scope of the research/inventive process • The scope of the work and the state of the art • Milestones and documentation • Projecting costs • Marketplace projections • Competitors and competing products • Progress tracking and review

Specific Planning:Checklists/Audits • CHECKLISTS • Provide structure and allow identification of research/industry/business specific concerns to be addressed • Determine the IP to be protected • Internal IP audits • Prioritize • Cost/benefit analysis • Protection from an offensive/defensive posture

Specific Planning:Running an Audit • Establish the goals of the audit • Determine the methodology of the audit • Identify and classify IP • Identify documentation • Examination of documentation • Ownership • Validity • Searches and opinions • Protection planning • Tracking • Final, updatable format

The end goal Now versus Later

APPENDIX I:Research exceptions to patent infringement: India and the U.S. • Whenever a patent is granted, patentee gets a right to prevent third parties from doing certain activities without the permission of the Patent Owner. Exercising any of the rights without permission of the Patentee constitutes the infringement and infringer is liable to be prosecuted in the court of law. However, rights granted to the Patentee are not the absolute rights and Patent Act provides for some exceptions. Section 48 and Section 107A of the Indian Patent Act, 1970 have been reproduced below which respectively provide for rights of the Patentees and certain activities that do not constitute infringement. • Section 48: • Rights of patentees.— • Subject to the other provisions contained in this Act and the conditions specified in section 47, a patent granted under this Act shall confer upon the patentee— • (a) where the subject matter of the patent is a product, the exclusive right to prevent third parties, who do not have his consent, from the act of making, using, offering for sale, selling or importing for those purposes that product in India; • (b) where the subject matter of the patent is a process, the exclusive right to prevent third parties, who do not have his consent, from the act of using that process, and from the act of using, offering for sale, selling or importing for those purposes the product obtained directly by that process in India: • Section 107 A: • Certain acts not to be considered as infringement.—For the purposes of this Act,— • (a) any act of making, constructing, using, selling or importing a patented invention solely for uses reasonably related to the development and submission of information required under any law for the time being in force, in India, or in a country other than India, that regulates the manufacture, construction, use, sale or import of any product; • (b) importation of patented products by any person from a person who is duly authorised under the law to produce and sell or distribute the product, • shall not be considered as a infringement of patent rights. • Getting into the background of the U.S. Patent laws, section 271 (e) (1) provides the counter part of the section 107A of the Indian Patent Act. This section was introduced after Hatch Waxman Act, 1984. Intention of this article is to compare and contrast the scope of the research exemption under the Patent laws (aka Bolar provision after the Roche Products, Inc. v. Bolar Pharmaceutical Co.) of India and USA. • Section 271 (e) (1) • It shall not be an act of infringement to make, use, offer to sell, or sell within the United States or import into the United States a patented invention (other than a new animal drug or veterinary biological product (as those terms are used in the Federal Food, Drug, and Cosmetic Act and the Act of March 4, 1913) which is primarily manufactured using recombinant DNA, recombinant RNA, hybridoma technology, or other processes involving site specific genetic manipulation techniques) solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products. • Comparison of Indian and USA law w.r.t. the products for which exemption is granted: • While India allows research exemption for any product, USA restricts it to drugs or veterinary biological products other than a new animal drug or veterinary biological product (as those terms are used in the Federal Food, Drug, and Cosmetic Act and the Act of March 4, 1913) which is primarily manufactured using recombinant DNA, recombinant RNA, hybridoma technology, or other processes involving site specific genetic manipulation techniques. • Comparison of Indian and USA law w.r.t. the law under which submission is to be made: • India allows research to be made for submission of information required under any law for the time being in force, in India, or in a country other than India. However, USA restricts it to the submission under a Federal law. • It’s very clear that though laws of both India and USA have provided for Bolar provision, laws of USA are more tilted in favour of Patentee as compared to the situation in India. • SOURCE: http://www.khuranaandkhurana.com/2016/11/17/research-exemption-under-patent-laws-in-india-and-usa/

APPENDIX II:Seagate and Willfulness: The US Supreme Court revisits willfulness in patent infringement cases • Supreme Court Upends Law of Treble Damages in Patent Cases • June 2016 • On June 13, 2016, the United States Supreme Court dealt the Federal Circuit another reversal on an issue of law fundamental to patent infringement litigation. Prior to the Court's decision in Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 14-1513 (which was consolidated for decision with Stryker Corp. v. Zimmer, Inc., No. 14-1520), the Federal Circuit had required a finding of willful infringement as a prerequisite to ordering enhanced damages under 35 U.S.C. § 284, which provides that courts in infringement cases "may increase the damages up to three times the amount found or assessed." Further, the Federal Circuit, in In re Seagate Technology, LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007) (en banc), had established a two-part test for determining the presence of willful infringement before a court could exercise its discretion to award enhanced damages, first asking whether the adjudged infringer's litigating positions were objectively reckless. Only if they were reckless was a court to then ask whether the infringement was subjectively willful. • The Halo decision ended this regime, which in some form or another had governed patent-infringement litigation since the creation of the Federal Circuit. Writing for a unanimous Court, Chief Justice Roberts said that the Seagate standard was not consistent with the statute—it is "unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts." In a paragraph summarizing the proper approach going forward, the Court wrote: • Section 284 allows district courts to punish the full range of culpable behavior. Yet none of this is to say that enhanced damages must follow a finding of egregious misconduct. As with any exercise of discretion, courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount. Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test. Consistent with nearly two centuries of enhanced damages under patent law, however, such punishment should generally be reserved for egregious cases typified by willful misconduct. • The Court likewise rejected the Federal Circuit's scheme of "trifurcated appellate review," under which it reviewed (i) the "objective recklessness" prong de novo; (ii) the subjective knowledge prong for substantial evidence; and (iii) the ultimate enhancement award for abuse of discretion, replacing it with a simple abuse-of-discretion standard. The Supreme Court also rejected the Federal Circuit's view that such determinations should be made by a clear-and-convincing-evidence standard, finding nothing in the statute or in historical practice that would support a heightened standard of proof. Hereafter, enhanced damages are no exception to the general rule that patent infringement cases are governed by a preponderance-of-the-evidence standard. • What does this mean? For one, when compared to the Court's recent decisions, it is a rare Supreme Court ruling in favor of patent rights, making it now at least somewhat easier to make out a case for enhanced damages than it was before. At the same time, though, it continues a trend of recent Supreme Court decisions that reject the notion that patent litigation is somehow exceptional and entitled to apply different rules. The Court's Halo opinion thus brings enhanced damages for patent infringement more in line with the traditional approach to punitive damages in the mine run of civil cases. • In the end, the standard of evidentiary proof may be lighter (preponderance of versus clear-and-convincing evidence), and the standard of appellate review may be less searching (abuse of discretion versus the former tripartite approach), but the results may not vary nearly as much. As the Chief Justice emphasized, "discretion is not whim," and punitive awards are still to be reviewed, even under a discretionary standard, in a manner designed to "limi[t] the award of enhanced damages to egregious cases of misconduct beyond typical infringement." • Left unsaid in the opinion is what role—if any—the jury will play in future litigation. Under the former Seagate regime, juries typically decided at least the subjective willfulness prong of the inquiry. Now that willfulness is no longer a prerequisite for an award of enhanced damages, it is an open question whether there is anything for a jury to decide with respect to enhancement under Section 284. This may be the first new frontier for litigation under the new Halo regime. • SOURCE:http://www.jonesday.com/supreme-court-upends-law-of-treble-damages-in-patent-cases-06-15-2016/.

APPENDIX III: Changes in US Trademark Fees • Effective January 14, 2017, the U.S. Patent and Trademark Office (PTO) adjusted a number of its trademark processing and service fees, including increasing fees for 42 different trademark filings. The trademark office, which is funded entirely through user fees (not taxpayer dollars) has stated generally that the fee increases will help defray administrative and operational costs and help upgrade its IT systems. • The good news for standard (electronic) trademark filers is that most new application fees have held steady or increased only modestly; however, fees for paper filers just went through the roof. Other notable changes apply to Ex Parte Appeals, Notices of Opposition, and Petitions for Cancellation. • The PTO has published a chart summarizing the fee changes that can be found here (note that paper filings are listed first). The following is a quick summary of noteworthy changes: • Applications -- Paper Filings: • All fees for paper application filings have increased significantly. Filing fees for new applications filed on paper have skyrocketed to $600/Class (a $225 increase from the previous rate of $375/Class) -- which should convince any hold-outs to utilize the electronic system. • Applications -- Electronic Filings: • While fees for new applications using TEAS Plus and TEAS RF applications did not increase, fees for TEAS Regular applications are now $400/Class, a $75 increase from the prior rate. However, the fee to request a Six-Month Extension of Time to File a Statement of Use was actually reduced from $150/Class to $125/Class. Other processing fees have doubled to $200/Class, such as Petitions to the Director and Requests to Divide an Application. Section 8/71 affidavits have bumped to $25/Class. • Trademark Trial and Appeal Board Filings: • Another area where trademark owners will feel the pinch is with Notices of Opposition, Petitions to Cancel, and Ex Parte Appeals. Requests for extensions of time to oppose an application, which used to be free, now carry a $100-$200 fee. Fees to initiate an ex parte appeal, new opposition, or cancellation proceeding have gone up $100/Class.

Planning for Liability: An Ounce of Prevention to Avoid Paying For a Pound of Cure